SBC to Start Project to Send TV Over Lines

By KEN BELSON and MATT RICHTEL

Published: November 17, 2004

SBC Communications, as part of its effort to compete head-on with the cable industry for television subscribers, plans to announce today that it will pay $400 million to Microsoft for software used to deliver TV programming over high-speed data lines.

It would be a crucial move into unproven territory for SBC, which like the other regional telephone giants wants to grow by expanding beyond phone and Internet services and into entertainment. To do that, SBC expects to spend more than $4 billion over the next three years on its fiber optic network to offer faster Internet connections able to carry digital video programming.

The deal is also a milestone for Microsoft. The company has spent roughly $20 billion in the last decade trying to break into the television business, but has little to show for that investment, industry analysts said. The 10-year agreement with SBC is Microsoft's first commercial contract to help deliver programming to millions of homes.

SBC plans to deploy Microsoft's software to encode television programming before it is sent to subscribers and then decode the same programs on TV set-top boxes in customers' homes. Most important, the software compresses digital signals so that video programs can be sent over high-speed data lines.

Microsoft has been testing this technology, called IP-TV, with several telecommunications companies outside the United States, including Bell Canada and Reliance Telecom, one of India's largest phone providers.

Though some analysts are skeptical of how quickly and cheaply the regional Bell companies can enter the television market, SBC plans to start selling programming through its fiber and copper network from the satellite provider, EchoStar, by the fourth quarter of 2005. SBC already has a separate agreement to market EchoStar's satellite service known as the Dish Network.

Like SBC, the Bell giants Verizon Communications and BellSouth, as well as many smaller phone companies also plan to sell television in the coming years to increase revenue and challenge the cable industry, which is fast moving into the phone business with Internet-based phones.

Richard Doherty, research director of the Envisioneering Group, a technology consultant on Long Island, said SBC's deal with Microsoft underscored how fierce the competition between cable and telephone companies was about to become.

''For the first time we hear thecable companies saying, 'the telcos are coming,''' he said.

Microsoft's software, along with SBC's plans to extend fiber optic cables to within a few thousand feet of customers' homes, will help the company provide digital video to consumers quickly, according to Lea Ann Champion, who runs Internet-based operations at SBC.

Speed is crucial, she said, because cable companies are urging their customers to replace their older analog TV services with advanced digital services.

The SBC-Microsoft alliance underscores the changing nature of how telecommunication services are delivered. To compete with cable's high-capacity pipe into the home, phone companies are rushing to invest billions in fiber optic networks that make it possible for them to send larger amounts of data to homes and businesses.

''This is a very big endorsement,'' said Moshe Lichtman, vice president of Microsoft TV. ''It's a signature of confidence in the direction Microsoft has been taking in this space.''

Consumers will potentially have hundreds of channels to choose from, although the delivery of that programming will be different from cable's. All IP-TV programs will be delivered as video-on-demand -- consumers request a program from a central server and it is delivered immediately. In contrast, cable companies typically send hundreds of channels to customers' homes all at once -- although newer, digital cable systems can also send programs one by one as in video-on-demand.

Initially, SBC hopes that the Microsoft technology will allow it to simultaneously send two high-definition channels and two standard-definition channels for consumers with two televisions on at once, as well as a high-speed Internet connection to consumers. Subscribers will need to add only a new set-top box to receive the programming. SBC will also have to achieve vast increases in data speeds on its network.

Microsoft's technology will also make it easier for SBC to offer TV programming to its customers on a variety of devices that might eventually include cellphones and personal digital assistants, when wireless speeds become fast enough.

The deal with SBC comes after several high-profile failures by Microsoft in its efforts to enter the lucrative television market. Since 1993, Microsoft has invested $20 billion in cable companies and other television-related endeavors, said Mr. Doherty, adding that several of those ventures soured.

But Microsoft appears to have learned from earlier mistakes. Instead of trying to win business by become an equity partner in cable companies, Microsoft is instead focused on improving the server computers and set-top boxes for IP-TV.

Other phone companies are looking at using Microsoft's technology.

Together, the Bells are expected to acquire 6.1 million television subscribers, or 6.2 percent of the national market, by 2010, according to Jeffrey Halpern, an analyst at Sanford C. Bernstein in New York.

A major hurdle for SBC, however, is how to increase the speed of its network to deliver the television and Internet services it promises. SBC will have to increase its current connection speeds by sevenfold, which may make the company's goal of providing television programming within a year difficult to achieve.

SBC said yesterday that it would start offering Internet-based phone service that operates over broadband lines in early 2005. The company is testing the service in Chicago, Dallas, Los Angeles and San Antonio. Verizon and Qwest plan to offer similar services.

Chart/Diagram: ''Competing With Cable''
Microsoft is providing software to SBC Communications that will allow it to distribute television programming over telephone lines.